Bank lending

Paul Krugman, writing in today’s New York Times, has a close look at the property and credit bubble in the US state of Georgia. The similarities to Ireland are telling:

So what’s the matter with Georgia? As I said, banks went wild, in a scene strongly reminiscent of the savings-and-loan excesses of the 1980s. High-flying bank executives aggressively expanded lending — and paid themselves lavishly — while relying heavily on “hot money” raised from outside investors rather than on their own depositors.

It was fun while it lasted. Then the music stopped.

Why didn’t the same thing happen in Texas? The most likely answer, surprisingly, is that Texas had strong consumer-protection regulation. In particular, Texas law made it difficult for homeowners to treat their homes as piggybanks, extracting cash by increasing the size of their mortgages. Georgia lacked any similar protections (and the Bush administration blocked the state’s efforts to restrict subprime lending directly). And Georgia suffered from the difference.

As we blogged last year: Morgan Kelly’s analysis demonstrates how it was excessive bank lending that caused the problems. Our banks went wild. Our bank executives paid themselves lavishly. And now the State is picking up the tab. What consumer protections did we have? What regulation did we have?

People are entitled to shelter, but are they really entitled to buy a house if they can’t afford it? I doubt you’d find many people then, and I’m not sure you’d even find them now, who’d be willing to acknowledge that owning your own home is not a civil right, but the result of careful planning, saving and budgeting. Some observe that there was no real choice, because all party manifestos in 2002 and 2007 competed to outspend each other. That is the case, but it exposes precisely the insistence of the people to have their votes bought rather than won. It also ignores the character issue.

And if there were consumer protections and proper regulation, the banks would never have been allowed to lend the way they did, and the credit bubble would not have snowballed into a property bubble resulting in an economic depression. Tell me again why the Regulator allowed the banks to lend to people at 8 to 10 times their annual salary, or why fraudulent statements of income were widespread?

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